business
THIRD-QUARTER RESULTS MIXED Softening U.S. economy reflected in rising sales but declining earnings of many major chemical firms George Peaff C&EN Northeast News Bureau
T
he relative strength of the U.S. economy was cited by many pundits as the overriding reason for President Clinton's recent reelection. But the slowing growth in the economy—evidenced by the slower 2.2% growth in gross domestic product (GDP) during this year's third quarter—was felt throughout the chemical industry. GDP growth in the second quarter was 4.7%, and in last year's third quarter it was 3.8%. Declining earnings and profitability
for petrochemical and commodity chemical producers in the quarter may offer hints that the chemical industry cycle is turning in favor of the specialty chemical producers. A shrinking economy, with its lower sales volumes and prices, is better weathered by the specialty makers, whose production costs slacken as the price of raw materials goes down. The petrochemical and commodity chemical producers, as suppliers to the specialty makers, suffer from falling sales volumes and prices. Thus, the lower earnings and profitability of the petrochemical and commodity chemical producers serve as tes-
Chemical industry leaders for the third quarter. . Sales Rank 1996
1 2 3 4 5 6 7 8 9 10
$ Millions
Profitability Rank $ Millions 1995
Rank 1995
Dow Chemical $4,992.0 1 Monsanto 2,176.0 2 Union Carbide 1,538.0 3 Eastman Chemical 1,167.0 4 Praxair 1,115.0 10 Air Products 1,051.0 6 Arco Chemical 1,035.0 5 Rohm and Haas 969.0 8 W.R.Grace 821.3 7 IMC Global 603.6 14
.
Earnings8
1
tament to the slowing in U.S. economic growth. "Our results reflect the intense competition in our industry today," says William F. Patient, chairman and chief executive officer of Geon, a Cleveland-based producer of polyvinyl chloride resins and compounds. "Although customer demand continues to be strong, selling prices during the quarter remained flat while raw material costs continued to rise." Geon's sales were $308 million in the third quarter, down 1% from the same period last year. For the first nine months of 1996, its sales totaled $865 million, a 14% decline from the first nine months of 1995. Earnings, however, fell much more: For the third quarter, they dropped 58% to $6.1 million, and for the first nine months, they fell 83% to $10.6 million. But pointing to the company's efforts to increase profitability by lowering costs and increasing productivity and quality, Patient adds that the company is "encouraged by the progress in our performance compared with previous down cycles." For the third quarter, combined earnings of 30 major chemical companies tracked by C&EN totaled $1.85 billion,
Dow Chemical $469.0 Monsanto 170.0 Union Carbide 161.0 97.0 Arco Chemical 96.0 Eastman Chemical Air Products 94.0 Praxair 88.0 87.0 Rohm and Haas Hercules 84.9 Great Lakes Chemical 68.3
I
1 4 2 5 3 6 10 12 7 8
Earnings as Rank % of sales 1995
Hercules International Flavors Great Lakes Chemical Nalco Chemical Loctite Union Carbide Arco Chemical Dow Chemical Ethyl Rohm and Haas
I
16.4% 4 1 15.0 12.1 5 6 11.9 12 11.5 10.5 3 9.4 7 9.4 7 9.4 15 9.0 20
. . . and for first nine months c»fl996 Rank 1996
1 2 3 4 5 6 7 8 9 10
Earnings8
1
Sales $ Millions
Dow Chemical $15,150.0 1 Monsanto 7,059.0 2 Union Carbide 4,598.0 3 Eastman Chemical 3,669.0 4 Praxair 3,298.0 11 Air Products 3,061.0 7 Rohm and Haas 3,017.0 6 Arco Chemical 2,976.0 5 W.R.Grace 2,656.2 8 IMC Global 2,275.7 14
I
Dow Chemical $1,491.0 1 Monsanto 795.0 3 Union Carbide 491.0 2 320.0 4 Eastman Chemical 288.0 7 Rohm and Haas 286.0 6 Air Products 284.0 5 Arco Chemical 249.2 8 Hercules Praxair 239.0 12 Great Lakes Chemical 212.5 10
Note: Based on 30 chemical companies listed on page 14. a After taxes.
12 NOVEMBER 18, 1996 C&EN
1
Profitability Earnings as Rank % of sales 1995
Rank $ Millions 1995
Rank 1995
I
Hercules International Flavors Great Lakes Chemical Loctite Monsanto Nalco Chemical Union Carbide Dow Chemical Arco Chemical Rohm and Haas
16.4% 4 16.2 1 4 12.5 11.3 8 11.3 12 7 10.9 10.7 3 9.8 13 9.5 6 19 9.5
Chemical industry 1996 third-quarter results • • • • •
Sales
Earnings
% change from year-earlier quarter
% change from year-earlier quarter
Sales rose 2% Earnings dropped 9% Profitability weakened Production gained slightly Prices slipped again
1994
1995
1996
1994
1995
1996
Profit margin
Production
Prices
After-tax earnings as % of sales
% change from year-earlier quarter
% change from year-earlier quarter
12 10
o\
I
I
nmrm 11111 p
4[ 2 0L 1994 Note: All s
2
1995
1996
I
. ' . I - ..
1994
' • • • • • ;».•'.'••;•:
\
1995
::
1996
1994
1995
1996
, earnings, and profit-margin data are based on 30 chemical companies on page 14.
down 9% from third-quarter 1995. Combined sales for the 30 companies increased 2% to $21.9 billion. For the first nine months of this year, earnings fell 7% to $6.05 billion on a 1% sales decline to $66.9 billion. Production and pricing statistics compiled by the U.S. government help illustrate the softness of the U.S. chemical industry and the general economy it feeds into. Chemicals and allied products production increased just 0.8% in third-quarter 1996, compared with the year-earlier quarter. Although that represented an improvement from the 1.4% production drop recorded in second-quarter 1996, last year's third quarter saw chemical production rise 2.7%
from the previous year's quarter. Meanwhile, prices for chemicals and allied products in the third quarter dropped a slight 0.2% from a year earlier. That compares with a 1.5% drop in the second quarter and an 8.2% gain in prices in third-quarter 1995. Profit margins—after-tax earnings as a percentage of sales—of the 30 companies dropped to 8.4% in the quarter, compared with 9.4% in third-quarter 1995. For the first nine months, profitability remained relatively high at 9.0%, compared with 9.6% for the first nine months of 1995. The largest of the 30 companies, commodity-chemicals-oriented Dow Chemical, posted an 18% drop in earnings to
$469 million for the quarter on a 2% increase in sales to $4.99 billion. For the first nine months, Dow's earnings gained 1% to $1.49 billion on a 3% sales decline to $15.2 billion. Dow says prices for its products declined 9% during the quarter, and feedstock and energy costs were higher compared with last year. But sales volumes increased 11%. Its performance chemicals and performance plastics segments had "solid results," helping cushion declines in its other segments, which include chemicals and metals, plastics, and hydrocarbons and energy. Indeed, as estimated by Andrew Cash, chemical industry analyst at New York City-based investment banker NatWest NOVEMBER 18, 1996 C&EN
13
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Third-quarter earnings slipped for nearly half of 30 major chemical firms THIRD-QUARTER 1996 Sales
Earnings8
($ millions)
Air Products Albemarle Arco Chemical Betz Laboratories Cabot Crompton & Knowlesc Cytec Industries Dow Chemical Eastman Chemical Ethyl
Change from 1995 Sales
$ 1,051.0 $ 183.8 1,035.0 304.2 464.6
94.0 7.9 97.0 10.9 22.9
7% -42 4 55 9
Earnings
NINE-MONTHS 1996 Profit margin" 1996
1995
Sales
Earnings8
($ millions)
1% -59 -17 -47 -39
8.9% 9.5% $ 3,061.0 $ 286.0 43.7 4.3 6.1 649.9 9.4 11.7 2,976.0 284.0 3.6 10.5 713.8 52.9 1,413.2 4.9 8.8 101.5
Change from 1995
Profit margin"
Sales
1996
4% -31 -10 27 1
Earnings
1995
4% -5 -28 -11 -26
9.3% 6.7 9.5 7.4 7.2
9.3% 4.9 11.9 10.5 9.8
468.4 321.7 4,992.0 1,167.0 304.2
17.0 25.9 469.0 96.0 28.5
3 0 2 -8 26
44 16 -18 -35 35
3.6 8.1 9.4 8.2 9.4
2.6 7.0 11.7 11.7 8.7
1,398.5 944.3 15,150.0 3,669.0 845.7
62.6 73.9 1,491.0 320.0 67.6
2 -2 -3 -A 21
-54 10 1 -27 22
4.5 7.8 9.8 8.7 8.0
9.8 7.0 9.4 11.5 7.9
First Mississippi Freeport McMoRan H. B. Fuller Geon Georgia Gulf
154.2 222.6 318.1 307.8 237.9
12.8 3.9 22.0 6.1 19.9
8 -8 2 -1 -12
-6 550 150 -58 -55
8.3 1.8 6.9 2.0 8.4
9.6 0.2 2.8 4.6 16.4
464.6 722.3 941.9 865.3 677.4
22.1 34.5 33.1 10.6 54.9
-4 -1 1 -14 -21
-48 242 33 -83 -65
4.8 4.8 3.5 1.2 8.1
8.8 1.4 2.7 6.2 18.1
W.R. Grace Great Lakes Chemical Herculesd IMC Global International Flavors
821.3 564.4 518.1 603.6 354.9
55.5 68.3 84.9 28.6 53.1
-13 -4 -2 1 -1
5 -8 6 -11 -16
6.8 12.1 16.4 4.7 15.0
5.6 12.7 15.2 5.4 17.6
2,656.2 1,696.3 1,516.9 2,275.7 1,112.0
152.5 212.5 249.2 156.3 180.3
-3 -6 -7 2 -1
14 -4 0 -5 -14
5.7 12.5 16.4 6.9 16.2
4.9 12.3 15.3 7.4 18.5
Loctite Lubrizol Monsanto Nalco Chemical Petrolite
201.8 392.9 2,176.0 343.3 92.1
23.2 31.7 170.0 41.0 4.9
3 -5 6 11 6
20 14 28 15 96
11.5 8.1 7.8 11.9 5.3
9.9 6.7 6.5 11.5 2.9
602.3 1,221.4 7,059.0 963.8 264.9
67.9 87.8 795.0 105.5 11.8
1 -A 3 7 -3
0 -12 22 5 -10
11.3 7.2 11.3 10.9 4.5
11.5 7.9 9.5 11.1 4.8
Praxair Rohm and Haas Stepan Union Carbide Witco
1,115.0 969.0 137.9 1,538.0 562.0
88.0 87.0 4.2 161.0 11.9
8 3 6 3 27
38 47 nm -29 -21
7.9 9.0 3.0 10.5 2.1
6.2 6.3 def 15.2 3.4
3,298.0 3,017.0 406.5 4,598.0 1,722.9
239.0 288.0 15.0 491.0 56.0
8 2 1 2 19
22 19 38 -28 -4
7.2 9.5 3.7 10.7 3.3
6.4 8.2 2.7 15.3 4.0
$21,922.8
$1,847.1
9.4% $66,903.8
$6,046.2
TOTAL
2%
-9%
8.4%
-1%
-7%
9.0% 9.6%
a After-tax earnings from continuing operations, excluding significant extraordinary and nonrecurring items. 1» After-tax earnings as a percentage of sales, c Results reflect August merger with Uniroyal Chemical, d Results restated to reflect divested businesses, def = deficit, nm = not meaningful.
Securities, compared quarter-toquarter, ethane costs were 79% greater during third-quarter 1996 than in third-quarter 1995, natural gas pricing was up 67%, and crude oil pricing was up more than 20%. But Cash says there is a "silver lin ing" in the third quarter's higher feed stock costs: "Inventories of basic chemi cals at the start of 1997 could be in favor able shape." Chemical pricing showed mixed re sults during the quarter, Cash says. Tita nium dioxide prices dropped 5 to 10% during the quarter, but have since stabi lized. Although caustic soda prices de clined about 12%, pricing for chlorine, its coproduct, "practically offset the de cline," according to Cash. Thermoplastic product prices stayed substantially level on a quarter-to-quarter basis. 14
NOVEMBER 18, 1996 C&EN
Other commodity chemical and pet rochemical-based producers suffered earnings declines during the quarter—in cluding Arco Chemical, Eastman Chemi cal, Georgia Gulf, IMC Global, and Union Carbide. "The good news for Eastman [in the third quarter] is that overall volumes of sales increased, up about 3%," says Ear nest W. Deavenport Jr., Eastman's chair man and CEO. "We achieved our thirdquarter earnings despite a 33% price and 7% volume decline in our largest busi ness, container plastics." Eastman's earnings for the quarter were $96 million, a 35% drop from the 1995 period, and sales were $1.17 billion, down 8%. For the first nine months, East man's earnings dropped 27% to $320 mil lion on a 4% sales decline to $3.67 billion.
Union Carbide's earnings for the third quarter dropped 29% to $161 million on a 3% sales gain to $1.54 billion. In the nine-month period, Carbide's earnings fell 28% to $491 million, and sales gained 2% to $4.59 billion. William H. Joyce, Carbide's chairman, president, and CEO, observes, "Feed stock costs are higher than at anytime in the past decade, resulting in polyethyl ene and ethylene glycol margins more commonly seen near or at the bottom of the chemical business cycle." Margins re fer to the profits derived after expenses have been met in the production and selling of a product. For oil and gas companies—signifi cant producers of petrochemicals—over all earnings were reduced by their chem ical operations. A look at seven of these
companies that report after-tax earnings for their petrochemical operations reveals that combined chemical earnings totaled $843 million in the third quarter, down 40% from last year's third quarter. For the first nine months, combined earnings were $2.38 billion, down 45%. The seven companies, which all had chemical earnings drops in both the third quarter and the nine-month period, are Amoco, Exxon, Kerr-McGee, Occidental, Phillips, Shell, and Sun. Overall sales and earnings for 13 major oil and gas companies climbed in both the third quarter and nine-month period. These companies' combined earnings for the quarter gained 4% to $4.62 billion on a 12% sales gain to $99.4 billion. For the year's first nine months, earnings rose 10% to $14.4 billion on an 8% sales gain to $288 billion. Exxon, the largest chemical produc-
er among the oil companies, posted chemical sales of $3.28 billion in the third quarter, down 2% from a year earlier, and $9.65 billion in the first nine months, down 5%. However, Exxon says its chemical sales volume was up 10% on a quarter-to-quarter basis. Lower prices, compared with last year's third quarter, and higher feedstock costs offset the sales volume gain, however. Earnings from chemicals declined 31% in the quarter to $341 million and also declined 31% in the nine-month period to $533 million. Shell's chemical earnings dropped 28% in the quarter to $112 million on a 10% sales decline to $1.08 billion. In the first nine months, its chemical earnings dropped 75% to $152 million on a 12% sales decline to $3.19 billion. The decreases in earnings in both periods were due to lower margins across
most of Shell's chemical product lines because of lower prices, the company says. But sales volumes increased in both the quarter and nine-month period, predominantly from primary chemicals. Diversified companies with substantial chemical operations fared better than their oil and gas company counterparts. The 12 diversified companies tracked by C&EN had combined sales of $21.6 billion in the third quarter and $66.1 billion for the nine months, up 3% in both cases from the 1995 periods. Combined earnings for these firms gained 16% in the quarter to $1.75 billion, and gained 8% in the first nine months to $5.35 billion. DuPont, by far the largest chemical producer of the diversified companies, posted sales for its three chemical segments—chemicals, fibers, and polymers—of $4.33 billion in the quarter and
Sales, earnings still growing for most oil companies and diversified firms NINE-MONTHS 1996
THIRD-QUARTER 1996 Sales
Earnings8
Change from 1995 Sales
($ millions)
Earnings
Profit margin0 1996
1995
Sales
Earnings8
Change from 1995 Sales
($ millions)
Earnings
Profit margin0 1996
1995
OIL AND GAS COMPANI ES Amoco Ashland Chevron Exxon Fina Kerr-McGee Lyondell Petrochemical Mobil Occidental Petroleum Phillips Petroleum Shell Oil Sun Co. Unocal
$ 9,019.0 $ 558.0 46.0 3,522.0 650.0 11,049.0 1,560.0 33,321.0 38.9 993.3
18% 8 19 8 8
-9% -6 29 4 -13
6.2% 1.3 5.9 4.7 3.9
8.1% $ 25,998.0 $ 1,874.0 124.0 1.5 10,113.0 5.4 1,966.0 32,382.0 5,015.0 4.8 96,737.0 3,005.7 114.9 4.9
7.2% 1.2 6.1 5.2 3.8
7.4% 0.7 5.4 5.2 4.4
57.7 35.0 668.0 159.0 208.0
10 0 9 9 14
105 -65 -10 14 38
11.8 2.8 3.3 5.7 5.3
6.3 8.0 4.0 5.4 4.4
1,412.6 3,651.0 58,546.0 7,765.0 11,474.0
152.0 74.0 2,218.0 449.0 639.0
6 -4 6 -2 13
52 -80 6 -22 42
10.8 2.0 3.8 5.8 5.6
7.5 9.5 3.8 7.2 4.4
7,267.0 2,898.0 2,611.0
493.0 -11.0 153.0
20 23 30
14 nm 206
6.8 def 5.9
7.1 3.0 2.5
20,824.0 8,273.0 7,573.0
1,323.0 -57.0 478.0
15 11 22
18 nm 133
6.4 def 6.3
6.2 def 3.3
12%
4%
4.6%
5.0% $287,754.3 $14,369.9
DIVERSIFIED MANUFACTURERS AlliedSignal $ 3,348.0 $ 253.0 945.0 DuPont 10,486.0 34.9 Engelhard 800.9 329.2 13.2 Ferro Corp.
-4% 3 11 6
17% 23 -6 35
7.6% 9.0 4.4 4.0
6.2% 7.6 5.1 3.2
FMC BF Goodrich Mallinckrodt Morton International
1,278.1 677.0 541.4 875.9
59.3 34.6 39.9 78.7
9 12 10 8
10 5 12 17
4.6 5.1 7.4 9.0
NL Industries Olin PPG Industries Vulcan Materials
255.3 748.6 1,801.2 443.6
-4.2 37.8 191.1 62.1
-3 -6 4 5
nm 22 12 5
def 5.0 10.6 14.0
TOTAL
11% 82 30 5 -4
487.6 1,247.0 20,326.0 2,786.0 3,897.0
$99,423.9 $4,615.6
TOTAL
13% 9 16 5 10
$21,578.4 $1,745.4
3%
16%
8.1%
10%
5.0% 4.9%
-1% 2 10 3
15% 7 6 8
7.1% 8.9 4.6 4.0
6.1% 8.5 4.7 3.8
8%
$10,473.0 32,403.0 2,359.5 1,022.1
$ 741.0 2,879.0 107.6 40.7
4.6 5.4 7.3 8.3
3,678.0 1,927.6 1,731.3 2,762.7
173.5 90.9 157.1 270.0
11 7 7 8
-6 12 17 19
4.7 4.7 9.1 9.8
5.5 4.5 8.3 8.9
6.8 3.9 9.9 14.0
752.1 2,362.0 5,463.6 1,171.4
21.1 134.5 591.9 140.8
-5 0 2 7
-59 19 2 15
2.8 5.7 10.8 12.0
6.5 4.8 10.9 11.2
$66,106.3
$5,348.1
7.1%
3%
8%
8.1% 7.7%
a After-tax earnings from continuing operations, excluding significant nonrecurring and extraordinary items. b After-tax earnings as a percentage of sales, def = deficit, nrri = not meaningful.
NOVEMBER 18, 1996 C&EN
15
business $13.5 billion in the first nine months, both 3% declines from the comparable periods in 1995. However, the company's chemical earnings from these sales rose 3% in the quarter to $557 million but declined 3% in the nine-month period to $1.69 billion. DuPont's overall sales were $10.5 billion, up 3%, in the quarter and $32.4 billion, up 2%, in the first nine months. Its total earnings were up 23% to $945 million for the third quarter and up 7% to $2.88 billion for the first nine months. In the third quarter, DuPont says its chemicals and specialties segments had sales volume increases of 4% in the U.S. and 7% outside the U.S. Worldwide, average selling prices were down 3% during the quarter, attributable equally to the stronger dollar and to lower prices for titanium dioxide pigments and polyester fiber. NL Industries, which relies on titanium dioxide pigment sales for more than 85% of its total sales, posted a $4.2 million loss in the third quarter and earnings of $21.1 million in the first nine months, down 59%. Its sales were
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down 3% in the quarter to $255 million and down 5% in the first nine months to $752 million. Vulcan Materials posted higher overall sales and earnings, led by its construction materials sector. The company's overall sales of $444 million in the third quarter were 5% more than those in the 1995 quarter, and its nine-month sales of $1.17 billion were 7% higher. Earnings increased 5% in the quarter to $62 million and were up 15% in the nine-month period to $141 million. But its chemicals segment, which represents about 35% of its total sales, had lower earnings for the quarter but higher earnings for the first nine months. In the quarter, Vulcan's chlor-alkali business was hurt by the softening in caustic soda prices, which declined 13% from the year-earlier quarter, says the company, and were 5% less than prices in this year's second quarter. Many of the specialty chemical producers—like many of the diversified companies—benefited from lower raw material costs in the third quarter compared with the year-earlier period.
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Several specialty-chemical-based companies posted significant earnings gains in the quarter, including Cytec Industries, Loctite, Lubrizol, Nalco Chemical, Praxair, and Rohm and Haas. Industrial gas maker Praxair, which completed its acquisition of CBI Industries in January, reported sales of $1.12 billion and earnings of $88 million for the third quarter. That compares to sales of $ 1.03 billion and earnings of $64 million in third-quarter 1995 on a pro-forma basis. For the nine months, sales were $329 billion, an 8% increase from the same 1995 period, and earnings were $239 million, a 22% increase. "We continued to see strong industrial gases demand in North America and Asia, while growth continued in Europe, but at a slower pace," says H. William Iichtenberger, Praxair's chairman and CEO. He adds that the Brazilian and Argentinean economies have improved and that the company's "cost-reduction actions" in South America connected with Liquid Carbonic, which was part of CBI, have nearly been completed. But some specialty chemical makers
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NOVEMBER 18, 1996 C&EN
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Return to: Jennifer H. D'Elia, ACS, 1155 Sixteenth Street, N.W., Washington, DC 20038, or call (202) 872-4080.
Ground rules for C&EN earnings analysis C&EN's quarterly report on financial performance of the U.S. chemical industry contains data from the 30 largest U.S. basic chemical companies and from 25 oil and diversified companies, each with more than $200 million in annual chemical sales. To be included in the table of 30 basic chemical producers, a company must have at least 50% of its sales in chemicals. That is why DuPont, for example, is included in the table of diversified manufacturers. In referring to chemical sales, C&EN means those chemicals whose molecular composition has been changed in the course of manufacture. Hence, chemical sales include those of traditional categories of basic petrochemicals and inorganics, organic intermediates and inorganic compounds, polymers such as plastics and fibers, and agricultural chemicals and specialty derivatives.
also viewed soft economic conditions during the third quarter. "A strengthening dollar versus most major foreign currencies, weak economies in Europe, and persistently soft demand in the polymer industry continued to limit sales and earnings," says Robert B. McDonald, CEO and president of West Lafayette, Ind.-based Great Lakes Chemical, a maker of flame retardants, polymer stabilizers, petroleum additives, and water treatment chemicals. Great Lakes' earnings dropped 8% in the quarter to $68.3 million and dropped 4% for the first nine months to $213 million. Sales in the quarter dropped 4% to $564 million and dropped 6% in the first nine months to $1.70 billion. International Flavors & Fragrances (IFF), New York City, seems also to have suffered from the economic softness of the various markets. Its earnings for the quarter declined 16% to $53 million and for the nine-month period declined 14% to $180 million. The company reported sales of $355 million for the quarter and $1.11 billion for the first nine months, a 1% dip from both 1995 periods. IFF says first-nine-month sales and earnings were "unfavorably affected by slow customer reorder patterns for fragrances in both Europe and the U.S." During the third quarter, reordering patterns improved, but the company doesn't
expect normal reordering to take place until sometime in the fourth quarter, primarily because of economic conditions in Europe. Sales for flavors during the third quarter were soft owing to downsizing and restructuring in some of IFF's major U.S. food customers, it says. And because of the unusually cool and wet summer in both the U.S. and Europe, flavor sales were lower for beverage, ice cream, and yogurt makers, according to IFF. Nonetheless, some chemical produc-
ers expect economic conditions to improve. "The global economic outlook remains positive," says J. Pedro Reinhard, Dow Chemical's financial vice president and chief financial officer. "Our September sales were particularly strong, creating good momentum for the fourth quarter," he points out. "While higher feedstock costs in the U.S. will continue to dampen results somewhat, we expect to see higher comparisons for the fourth quarter versus last year."^
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